Top 5 climate-related liability issues that your board should consider
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- Climate change poses material financial risks and opportunities for companies of all kinds, which can trigger commercial liability exposures.
- Amid an increasing focus on governance, strategy and risk oversight, boards and directors face an elevated climate-related liability environment.
- Here are the top five climate liability issues that directors (and chief legal officers) should interrogate so as to manage their liability exposures.
A decade ago, ‘climate change law’ largely centred on compliance with environmental, natural resources, energy and planning regulations. Unless your company was a major fossil fuel producer or consumer, the potential for a climate-related claim may have seemed remote. And even then, the prospect of a loss in court may have seemed unlikely.
That was then. Now, new regulatory frameworks are being enacted across the world, and climate cases are on the rise. In fact, more than 230 climate cases across 55 countries were filed in 2023 – from the United States to South Africa, Brazil, India, China, Indonesia, Panama, Nigeria and beyond, according to the Climate Change Litigation Databases.
Claims range from breach of regulation to breach of contract, from human rights violations to securities fraud. Defendants feature companies from a broad range of economic sectors – from energy and agriculture to forestry, industrial production, aviation, shipping, finance and housing.
With the spread of climate litigation claims, and with increasing focus on governance, strategy and risk oversight within emerging mandatory climate-related financial reporting standards, directors face an elevated personal climate-related liability environment.
In response, insurers are increasingly adjusting coverage conditions and renewal questionnaires, and withdrawing cover for projects delayed due to litigation. Most of the world’s largest commercial law firms now promote their climate change law expertise. However, many boards, and the chief legal officers by whom they are advised, remain unaware of how climate liability risks have evolved.
Drawing on the expertise of the World Economic Forum’s Climate Governance Community of Experts, here are the top five climate liability issues that all directors (and chief legal officers) should interrogate as they oversee their company’s approach to liability risk – and to manage their own personal liability exposures. These are:
1. Climate litigation – exposing the ‘unknown unknowns’
Companies (and their directors) are facing climate-related liability risks from increasingly novel angles. A failure to consider the expansion in claims exposures can lead to a potentially material financial risk not being identified, priced, managed or disclosed.
Key questions:
- How have we considered the exposure of our company – and of the directors personally – to the expanded litigation risks associated with climate-change? Have we considered ‘novel’ avenues of claim – such as tort, human rights, biodiversity loss and constitutional law claims – as indicators of the direction of litigation travel? What are the consequences for our business, both legally and commercially?
- Have we considered the governance structure and processes to better identify the unknown unknowns? What steps are management taking to detect climate-related opportunities that the company could leverage to reduce exposure to litigation and to positively impact the bottom line?
- Are we considering the regional and sectoral variations of potential claims, and the severity of the legal risks connected to physical and transition risks?
- Do we have appropriate oversight of a transition plan to ensure our climate ambitions are backed up with clear medium- and long-term implementation plans?
2. Contract – updating the boilerplate approach to risk allocation
The increasing frequency and intensity of extreme weather events brought about by climate change means that the ‘unprecedented’ can no longer be considered ‘unforeseeable’. The law often considers proactive adaptation as a reasonable and proportionate response in the evolving risk environment.
However, many companies still take a ‘boilerplate’ approach to force majeure (or ‘act of God’) clauses in their material contracts. This can leave a company exposed to significant unbudgeted liabilities – perhaps even large enough to cause bankruptcy.
Key questions:
- How have we updated our ‘business as usual’ risk projections for project and supply chain interruption under new climate norms and forward-looking scenarios?
- How have we assessed our material contract risk exposures from ‘force majeure’ clauses that are no longer fit for their protective purpose? How have we updated our approach in material contract negotiations?
3. Consumer protection and securities fraud – aligning ambition with action
Activist litigants and other stakeholders throughout the value chain may claim a breach of consumer- and/or securities- fraud laws from any ‘say-do gap’ between the climate ambition announced by a company, and the actions taken (or lack thereof) to pursue those targets. Large companies are often targeted to amplify a claim’s impact.
Key questions:
- How have we aligned our internal management capacity with our external decarbonization ambitions? How have we aligned our capex and strategy? Have we connected the dots between material risks to our financial prospects, and implications for assumptions underlying our balance sheet (such as asset useful lives, impairments and demand outlooks)? Have we considered our entire supply/value chain?
- Have we considered the perspectives of our key internal and external stakeholders (communities/next generation) to ensure our ambition levels align with expectations towards the company’s strategic direction?
- How have we ensured that our emissions reduction targets are being operationalized within supplier and customer contracts? In doing so, how have we ensured that the rights of smaller counter-parties have been considered – for example, under relevant competition and unfair contract laws?
4. Misleading disclosure and consumer fraud – maturing our approach to promotion of green credentials
Until recently, general descriptions of products or companies as ‘green’, ‘sustainable’ or ‘climate-friendly’ were so vague that they were broadly defensible. Now, with consumers and investors placing more value on sustainability characteristics, these terms convey elevated – and often specific – meanings.
In addition, regulators in many jurisdictions – including, for example, the EU and UK – are adopting laws that limit when ‘environmental’ labels can be used and the conditions that must be explained, such as product composition and the use of offsets.
Key questions:
- How has management reviewed and updated processes for the publication of external communications – whether it be promotional materials, on our website, contractual representations or fundraising disclosures – to ensure that the evolution in regulatory and market norms is being taken into account?
- Have we considered verification of involvement in carbon offset mechanisms and how this affects our communication around net zero ambitions?
5. Financial reporting – do our information systems and verification processes remain fit for purpose under evolving frameworks?
Around the world, regulators and accounting standards setters are responding to calls from investors to provide consistent frameworks for the financial reporting of sustainability-related information. Regimes such as the International Sustainability Standards Board (ISSB) and Corporate Sustainability Reporting Directive (CSRD) will require companies to disclose data that has not previously been collected or verified under financial information systems, and a significant increase in forward-looking statements.
In addition to corporate exposure for regulatory breach or misleading disclosure, directors may be personally liable for any mis-statements that they approve, and/or for a failure to diligently oversee their company’s preparation for the step-change in reporting requirements.
Key questions:
- Have we considered whether our oversight of financial reporting systems, and procedures for board verification and assurance of disclosures, remain fit for purpose under emerging climate-related financial reporting regimes? Have we considered the implications of the increased volume of forward-looking statements, and significant judgments, that will be required?
- What questions should we be asking management (particularly the CFO), now, to ensure we are diligently overseeing management’s approach to the step-change in financial reporting expectations?
Climate change impacting companies’ exposure to litigation
In conclusion, climate change is transforming the exposure of companies to litigation. The breadth of potential claims and the immediacy of risk arising from a failure to adequately identify and manage both the physical and transition risks arising from climate change should not be underestimated.
How is the World Economic Forum fighting the climate crisis?
The growing number of climate-related claims across various jurisdictions underscores the importance for companies to thoroughly assess their exposure to these risks. By reviewing and enhancing their approach to climate governance, boards of directors can reduce the risk of litigation to the companies they serve and for themselves personally.
Disclaimer: the views and perspectives expressed herein are a result of a collaborative drafting process of the Climate Governance Community of Experts (CGCE), an inter-disciplinary climate governance expert group convened by the World Economic Forum. They do not necessarily represent the views of the World Economic Forum, nor those of individual CCGE members or their organizations. Furthermore, the views and perspectives outlined in this text do not constitute any general or specific legal advice related to any ongoing or future legal processes in any particular context or jurisdiction.
This article is the final one in a series of three created by the Community of Climate Governance Experts cohort of 2023-2024. The Forum would like to thank all contributors for their valuable input over the past year.
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